Dynegy bonds jump on optimistic projections, carry other energy players with them

By Paul Deckelman and Paul A. Harris

New York, Jan. 7 - Dynegy Inc. bonds and shares were sharply higher Tuesday, as the Houston-based merchant energy company released optimistic earnings projections and said it was continuing to pare down debt. That, plus the news that a federal judge had dismissed a suit brought by a Washington state power generating authority against Dynegy and eight other sector players pulled the whole sector higher.

In the primary sector Remington Arms Co. Inc. was heard to be taking aim at the junk market with a $175 million offering of eight-year notes, expected to hit the road as early as Wednesday.

Dynegy's bonds jumped on the positive guidance a trader quoting the company's 8 1/8% notes due 2005 going home at 61 bid/63 offered, well up from 37 bid/39 offered on Monday.

He called the rise "unbelievable," attributing it to "a major short squeeze" affecting the utility sector and other recently beaten-down areas such as some of the telecom names.

"There was a short squeeze. Short was not the place to be."

Dynegy's 6¾% notes due 2005 were seen at 58 bid/60 offered, versus their opening at 39 bid/40 offered. Dynegy's 8¾% notes due 2012 were being quoted bid around 57. Its Illinois Power 11½% notes due 2010 were seen at 96 bid.

On the stock side, Dynegy's shares jumped 64 cents (45.07%) to end at $2.06 on New York Stock Exchange volume of 44.7 million shares, about six times the norm.

Dynegy said that it expects to post per-share earnings of between eight and 15 cents in 2003, translating to between $31 million and $54 million. Wall Street analysts had been forecasting earnings of about three cents for the year.

Dynegy said it expects to produce earnings before interest and taxes of $465 million, estimating interest costs on its $2.1 billion of debt at $417 million and taxes at $17 million.

The company said that as of Dec. 31, its liquidity was $1.47 billion, consisting of $915 million in cash, including $137 million in escrow relating to its recent Illinois Power bond offering (the utility sold an upsized $550 million issue of 11½% first mortgage notes due 2010 on Dec. 17), $1.4 billion in bank lines and $258 million of remaining highly liquid inventories. That was reduced by $228 million of draws against bank lines and $878 million in letters of credit posted for collateral relating principally to third-party aspects of the company's marketing and trading business.

Dynegy expects its core energy generating business to improve as the U.S. economy improves - while it will be freed of the drag on earnings produced by its underperforming energy marketing and trading operations, which have been wound down.

Dynegy further said that it reduced its bank exposure and debt by approximately $850 million in the fourth quarter, and will re-pay an additional $100 million later this month.

On a morning conference call, Dynegy said that its key effort this year would be maintaining adequate liquidity, paying down debt and reducing its bank exposure. "The banks will see the company stepping up and delivering on its restructuring plans, maintaining liquidity and providing the banks with a means to reduce exposure to the company and to the energy business," CEO Bruce Williamson said.

Besides its hopeful outlook, Dynegy was thought to have gained in response to the news that a federal judge in California threw out a lawsuit brought against Dynegy and fellow energy operators such was Mirant Corp., Reliant Resources Inc, and Duke Energy Corp. by Snohomish County (Wash.) Public Utility District, which alleged that the companies had conspired to manipulate power markets by fixing prices and withholding electricity supply, thus driving up electricity prices. The judge said this was a matter for the Federal Energy Regulatory Commission to consider.

That good news coming out the recently tattered utility sector was seen helping the shares and bonds of other players, such as Williams Cos., Calpine Corp, and AES Corp.

A trader said Calpine was "flying," not only because of the Dynegy news, but because of its own good fortune as well in having signed a five-year deal to provide geothermal power to Pacific Gas & Electric Co. California's largest utility. The San Jose, Calif.-based independent energy producer is hoping that such long-term deals will insulate it from the ups and downs of the volatile power market, where prices are currently depressed.

Calpine's 8½% notes due 2011 pushed up to 50 bid/51 offered Tuesday from prior levels at 45.5 bid/46.5 offered. Calpine's shares rose 21 cents (5.57%) to $3.98.

AES's bonds, which frequently move in tandem with Calpine and other energy producers, was also up, its 10¼% notes due 2006 seen at 50 bid/51 offered, its 9½% notes due 2009 at 66.5 bid/67.5 offered and its 8 3/8% notes due 2007 at 50 bid/52 offered, all up about four or five points across the board.

Outside of the energy producers, Lucent Technologies Inc.'s 7¼% notes due 2006 were heard 3½ points better, at 64 bid/65 offered, while Nortel Networks, which follows Lucent up and down more often than not, was four points better, its 6 1/8% notes due 2006 at 72 bid/73 offered.

Rite Aid Corp.'s 6 7/8% notes due 2013 were quoted at 73 bid, its 7 5/8% notes due 2005 at 94 bid/95 offered and its 7 1/8% notes due 2007 at 85.5 bid/86.5 offered, all about two points better, as the Camp Hill, Pa.-based drugstore chain reported a 5.7% gain in December same-store sales from a year earlier.

In the primary, Remington Arms of North Carolina, took a bead on investors' wallets during Tuesday's session, in which a variety of sources told Prospect News that those wallets are presently thought to be reasonably full.

Remington Arms' roadshow starts Wednesday, according to syndicate source, who told Prospect News Tuesday that Credit Suisse First Boston will do the bookruning on the Madison, N.C. hunting, fishing and shooting sports company's new offering of $175 million of eight-year senior notes (B2). The deal is expected to price on Jan. 17.

In a press release Tuesday the company, a wholly-owned subsidiary of RACI Holding, Inc., a Clayton, Dubilier & Rice, Inc. portfolio company, said it is doing a recapitalization that in addition to the bonds includes a $30 million equity investment in RACI from a fund managed by Bruckmann, Rosser, Sherrill & Co. LLC, and the refinancing by Remington of approximately $100 million of debt.

The news release went on to specify that the CD&R Fund IV purchased Remington in December 1993 for $75 million in equity and currently owns approximately 87% of RACI. As part of the transaction CD&R Fund IV and other current shareholders, including Remington's management, will retain a significant percentage of RACI's common stock and receive a combination of cash and senior notes issued by RACI. Specific terms were not disclosed.

CD&R will continue to remain active in the company's strategy and governance. RACI's current 10-member board of directors will remain in place and will be expanded with the addition of two new members nominated by BRS.

Also on Wednesday Fischer Scientific International announced plans to refinance its $600 million of 9% senior subordinated notes due 2008, callable on Feb. 1, 2003. The financing, market sources told Prospect News, will include a bank loan and new senior subordinated notes via Credit Suisse First Boston, Deutsche Bank Securities and JP Morgan. The company declined to comment.

Hence Tuesday's session came to a close with two deals known to be headed for the road: Remington Arms, announced Tuesday, and American Media Inc. $150 million of eight-year senior subordinated notes (B2/B-), via JP Morgan, announced during Monday's session.

High yield syndicate sources have recently been advising Prospect News, however, that a meaningful buildup on the forward calendar is imminent. One source claimed to be tracking 10-12 deals that could launch before February. Another estimated that the first four to six weeks of 2003 could see $5-$6 billion of high-yield new issuance.

"A lot of people say they are going to announce stuff in the next three to five business days, so it should be extremely busy next week," one sell-side official said Tuesday.

This source noted that various signs point to a relatively rapid intensification of new issuance volume in high yield.

One sign, the source said, is the broad-based rally seen among issues in the secondary market during the first two sessions of the week of Jan. 6 and continuing into and through Tuesday, with nearly all sectors up a point.

"It's real money buying," the source said. "There's a lot of cash out there and not enough new issue supply right now. So you have to put the money to work in the secondary market."

The second sign, according to the sell-sider, is the cash itself, with 11 of the past 12 weeks having seen inflows amounting to just shy of $5 billion into high-yield mutual funds.

"Equities had their largest outflow in years," said this official, making reference to reports that AMG Data Services had tracked $72.4 of outflows from equity funds during the second half of 2002.

"People have to park their money somewhere," the official stated.

Finally this official conceded that some investors could conceivably be focused on Monday, Jan. 27, only 14 business days hence. It is on that date that United Nations inspectors - who have yet to publicly report any sign of prohibited weapons in Iraq - are due to file their first comprehensive report on the Middle Eastern state's capabilities with regard to weapons of mass destruction. In light of what is reported to be a massive build-up of troops and equipment in the vicinity of Iraq, now underway, the U.S. and British governments are said to be assessing possible military moves should that report prove inconclusive.

"People are definitely concerned about the 27th," the sell-sider acknowledged during the Tuesday conversation with Prospect News. "But at the same time you hear that accounts have a lot of cash to put to work.

"I think if we make it to the 27th of January okay the market should be in good shape."

Meanwhile Kathleen Gaffney, vice president and portfolio manager of the Loomis Sayles High Income Funds, professed scant interest in the new issue calendar when contacted by Prospect News on Tuesday.

"We don't tend to be focused on the new issues," Gaffney said. "We think in general that the calendar will be lighter than in the past years. And it's going to be company-specific.

"We're walking that fine line between inflation and deflation, which is not good for leverage. So if issuers need to raise the money they are going to have to price to sell."

As with the sell-side official quoted above Gaffney reckoned that a considerable amount of the cash flowing into high yield had come over from the rocky shores of the stock markets.

"I think you're seeing a lot of people allocating to high yield as opposed to rebalancing for equities," she said. "So there is a little bit of equity substitution there."

As to the recent rallying in the secondary market the Loomis Sayles portfolio manager sounded a cautious note.

"People have got all this money coming in," she said, "and they're looking at where the spreads are, and they are willing to put money into the things that are the cheapest.

"People have stepped up their appetites for risk so you're seeing pretty strong demand in the telecom and the utilities and the cable sectors.

"I think the market in those sectors is on its way to being overbought," Gaffney added. "I think that some of those names deserve to be where they were. I don't know what's changed except that people have more cash which means that there will be less value in the market as things continue to run."

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.